Tesla paid CEO musk $3 million to buy director and executive liability insurance

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Tesla paid CEO Elon Musk himself $3 million for a 90 day important business insurance that would protect the company’s directors and executives from certain legal fees, according to a new regulatory filing filed by Tesla on Wednesday. Tesla has ended the controversial arrangement and obtained the insurance in a more traditional form, the filing said.
In April, Tesla told its shareholders that it would stop paying “Directors’ and executives’ liability insurance” for a year, and would pay musk a sum of money to cover the legal defense, settlement or judgment costs of the company’s executives or board members. At the time, Tesla said in a document that the company adopted this approach because the premium was “disproportionately high”. But legal experts said the unusual move could create a conflict of interest.
Glass Lewis, a proxy adviser, opposed the re-election of Tesla’s chairman, Robyn Denholm, and plans to abandon third-party “director and executive liability insurance” in response. Later, Tesla’s board said it would try to replace its previous liability insurance policy, and Lewis agreed.
A very unusual move
As of June 2020, musk and Tesla had an agreement to provide up to $100 million in “indemnity insurance” for 90 days of director and executive liability insurance, according to the filing. In general, “indemnity insurance” can protect a company and its board members and executives from having to pay their own defense, settlement, or judgment costs in the face of costly litigation.
Tesla is facing high-risk lawsuits over a variety of issues, including the long-term performance of its car batteries and the decision to acquire Solar City, a solar supplier.
In return, Tesla “agreed to pay a total of $3 million to the company’s CEO,” the document said, adding that the rate was based on a “market-based premium,” prorated over 90 days and then discounted by half. Earlier, Tesla also disclosed that it would pay musk at least $1 million in “director and executive liability insurance.”.
Tesla said the agreement had now been terminated and the company “instead tied directors’ and executives’ liability insurance policies with third-party airlines.”. So far, Tesla has not specified which airline operators are covered by such insurance for its board members, or what rate the company will pay for its future “director and executive liability insurance” policy.
The move means there could be a conflict of interest between musk and Tesla’s board, which should have overseen him.
“At any given time, it is extremely unusual to replace directors’ and executives’ insurance policies with executives’ personal guarantees.” Kevin hirzel, a managing member of hirzel law in Detroit. “If the CEO guarantees payment under a compensation agreement, there may be a conflict of interest and a threat to the independence of the board.” “It was the right thing for Tesla’s board to obtain traditional directors’ and senior management liability insurance policies from third-party insurers,” he added
Charles Elson, a professor of corporate governance at the University of Delaware, agrees that it is a good thing that Tesla is starting to offer such insurance to directors and executives through third parties. “I don’t think it’s advisable for the CEO to compensate the company and the directors, because in this relationship, directors and CEOs are too closely connected,” he said. The board of directors has the right to supervise the CEO, and such a connection will make it more difficult for board members to supervise well on behalf of all shareholders. ”
Elson points out that $3 million worth of insurance is not a trivial sum. Looking ahead, Tesla should be able to demonstrate that it had sought alternative options during this transitional period, that the amount paid to musk was fair, and that it would explain in more detail why it failed to obtain a third-party policy earlier.