Starstruck: The Superstar CEO Concept in Delaware Corporate Jurisprudence

In Tornetta v. Musk, Chancellor Kathaleen of the Delaware Court of Chancery ruled in favor of plaintiff-stockholders who challenged Tesla CEO Elon Musk’s record-breaking compensation plan. My recent article, Starstruck: The Superstar CEO Concept in Delaware Corporate Jurisprudence, analyzes one of the most unique aspects of the opinion—its introduction into Delaware jurisprudence of the ‘Superstar CEO’. While Chancellor McCormick likely used the Superstar CEO concept illustratively, I analyze how it was discussed in the Tornetta opinion and how it could be interpreted as a full-fledged doctrine of Delaware common law. I propose two possible interpretations, demonstrating the wide precedential impact that future judicial interpretation of the concept could have on Delaware’s controlling shareholder doctrine, standard for director independence, and corporate jurisprudence as a whole.

Background

Superstar CEOs are individuals who directors, investors, and markets believe make a unique contribution to a company’s value. Their presence challenges traditional corporate governance norms by blurring the line between visionary leadership and unchecked power. Superstar CEOs are also often founders and owners a significant portion of the company’s equity. This unique value-adding perception grants them considerable influence within the company, effectively diminishing traditional checks and balances by boards and shareholders. It is difficult to differentiate a true Superstar CEO from a merely talented leader, as there is no simple bright-line rule that can be consistently applied.

In 2018, Tesla’s board awarded Musk a ten-year equity compensation plan worth up to $55.8 billion, contingent on Tesla meeting market-cap and operational milestones. The compensation award was approved by the majority of disinterested shareholders. A group of minority shareholders then brought against Musk, Tesla, and individual members of the board, alleging that Musk’s compensation was excessive and was the product of breaches of fiduciary duty.

In its January 2024 Tornetta v. Musk opinion, the the Delaware Court of Chancery found that Tesla’s disinterested shareholder vote did not shift the burden of proof to the plaintiffs since the Tesla proxy statement “inaccurately described key directors as independent and misleadingly omitted details about the process.” The court held that the defendants failed to demonstrate the grant was entirely fair and found deficiencies in both the process and price requirements of the standard. Accordingly, the court ordered recission of the grant.

Judicial Application

The court first introduced the ‘Superstar CEO’ concept in its discussion establishing Musk as a controlling shareholder for the compensation grant transaction. After recounting numerous instances of his disregard for board oversight, the Chancellor quotes Assaf Hamdani and Kobi Kastiel’s 2023 article, Superstar CEOs and Corporate Law, to define the term and show how a Superstar CEO can exert unusually expansive managerial authority over a company. She elaborates that the changes in the dynamics of corporate decision making are more acute when the Superstar CEO’s interests are directly concerned, especially regarding the CEO’s compensation. The Chancellor concluded that when a Superstar CEO is present, robust protections—like staunchly independent directors—are crucial to safeguarding minority shareholders.

The court is clear in describing where the Superstar CEO has the greatest effect—director independence. Because the Superstar CEO creates a “field of distortion” that interferes with board oversight, independent directors need to be “staunchly independent.” This seems to imply a higher standard for director independence in the presence of a Superstar CEO. Many directors failed this staunch independence test since they had close personal or financial ties to Musk and seemed to act as his collaborators rather than as a negotiating counterpart.

The court concludes its discussion of the concept by stating that due to the difficulty in determining when an executive is a Superstar CEO, the concept “should not be deployed far and wide.” The Chancellor adds, “If nothing else, the Superstar CEO concept is valuable for its descriptive power, because it explains what took place in this case.” While likely illustrative in nature, the ambiguity surrounding the concept’s deployment could lay the groundwork for the Superstar CEO concept as a future doctrine of Delaware corporate common law.

Future Implications

I propose two plausible ways the Superstar CEO concept as described in Tornetta could be interpreted as a common law doctrine: a broad view and a narrow view. The broad view sees the Superstar CEO doctrine altering how courts evaluate control, thereby raising the bar for director independence and making it more likely that individuals like Musk will be treated as controllers in future transactions. The narrow interpretation could view the Superstar CEO concept as just one factor among many in the holistic evaluation of a CEO’s influence for the purpose of establishing him or her as a controller. This would likely indicate that the court’s evaluation of director independence for Tesla’s board members would have wider precedential value since the “staunchly independent” standard would apply to all directors rather than only to those at a company with a Superstar CEO.

Both potential interpretations would thereby serve to expand the scope of the controlling shareholder doctrine. The narrower view would likely have a larger overall impact due to its wider applicability. However, the court did not lay out a clear test for determining when a CEO makes a unique contribution to company value, as would be necessary for the doctrine to be uniformly applied and optimally predictable.

Conclusion

The Tesla board then resubmitted Musk’s compensation package for shareholder approval with increased disclosure and prior approval by a special independent committee. Shareholders reapproved the compensation package by a strong majority. Tesla then filed a Motion to Revise the Post-Trial Opinion in an attempt to reinstate Musk’s compensation plan. The court again refused, upholding its prior decision on primarily procedural grounds. Since the court did not review its determination of Musk as a controlling shareholder, the status of the Superstar CEO concept in Delaware corporate jurisprudence remains to be determined.

The author’s complete paper can be found here.

Dominic Keilty is a J.D. Candidate at Vanderbilt Law School