Tesla CEO, and now Twitter CEO, Elon Musk has certainly been at the forefront of news reports as of late, mostly not to his benefit. Musk is also facing a lawsuit brought by a Tesla shareholder regarding the enormous pay package he received in 2018 as CEO of the electric vehicle company.
The Tesla shareholder states that Musk’s compensation package, worth over $50 billion, constituted unjust enrichment.
Unjust enrichment occurs when one party provides a benefit to a second party without ever receiving the legally required appropriate restitution. Basically, it is a contract. One party met their duty under the contract and the second party did not and was unjustly enriched to the detriment of the first party.
Duty of care
The Tesla shareholder also states that the Tesla board of directors did not act in the shareholders’ best interests. The Tesla shareholder claims Musk was only a “part-time CEO” due to his work with other enterprises.
A board of directors has the duty to act in the best interest of company shareholders. This is one of a board’s five fiduciary duties, the duty of care.
Two types of shareholder lawsuits
A shareholder lawsuit can either be a direct lawsuit or a derivative lawsuit.
A direct lawsuit is brought by a designated shareholder on behalf of a class of shareholders who suffered financial damages at the hands of the officer at issue.
In a direct lawsuit the plaintiff must be able to show they were personally harmed by the corporation. The defendant can be the board of the directors and/or the corporation itself as a separate legal entity.
A derivative lawsuit is brought by a designated shareholder on behalf of the corporation itself. The defendant can be officers, board members and other company insiders who have allegedly committed acts that caused the corporation to suffer damages.
Generally, the shareholder in a derivative lawsuit must be able to demonstrate that they brought the issue to the attention of the directors, but the directors did not act on the issue.
Business litigation is complex
It will be interesting to see how Musk fares in this recent lawsuit. Still, any business litigation can be complex. Shareholders in Detroit who suspect their board breached a fiduciary duty may have options for compensation.