A new filing revealed on Wednesday that Elon Musk personally received $3 million in payment from his company for 90 days worth of an important kind of business insurance that compensates company chiefs from specific legal costs.
Tesla Inc, which Musk heads, ended that controversial arrangement and received a more conventional form of company insurance, according to the filing.
As of June 2020, the Tesla CEO agreed to an arrangement to provide directors and officers liability insurance (D&O) “indemnity coverage,” up to $100 million, for a 90-day period.
Overall, indemnity coverage safeguards the company, its executives, and board members from having to cover defense, settlements, or judgments made against them.
According to the filing, Tesla “agreed to pay our CEO a total of $3 million", which is based on a “market-based premium” as allocated for the 90 days then discounted by half. The company revealed earlier it would provide Musk with a payment of up to $1 million for the D&O coverage.
That agreement has ceased and Tesla instead the company has “bound a customary directors’ and officers’ liability insurance policy with third-party carriers".
It has not been specified what carriers board members will be covered by and the rate of payment for the D&O policy moving forward has not been revealed.
Tesla shareholders were informed in April that the D&O would be suspended for a year. In its place, Musk would personally cover the costs of legal defenses, settlements, or judgments made against the company or board members.
The company said in a filing at the time that they were taking this approach due to “disproportionately high" premiums, despite claims by legal experts that the rare move could have led to significant conflicts of interest.
“It is highly unusual to replace a directors’ and officers’ insurance policy with a personal guaranty from an officer for any period of time", said Kevin Hirzel, Detroit-based Hirzel Law's managing member.
“If the CEO is guaranteeing payment under the indemnification agreement, it leads to potential conflicts of interest and threatens the independence of the board of directors."
Hirzel said that Tesla’s board "did the right thing in obtaining a traditional directors’ and officers’ liability insurance policy from a third-party insurer".
Charles Elson, professor of corporate governance at the University of Delaware, echoed Hirzale's support for Tesla's return to third parties for directors and officers coverage.
“I don’t think that it was advisable for the chief executive officer of the company to indemnify the company and directors. It linked the directors too closely to the CEO because of that relationship. The CEO is an individual over whom the board has authority. And such a linkage would make it more difficult for board members to exercise good oversight on behalf of all shareholders."
Elson said that a $3 million dollar payment for insurance amounting to $100 million dollars is not insignificant.
He suggested that Tesla should provide evidence that they looked for other quotes for the interim period, that the CEO's payment was fair, and explain in extensive detail that third-party coverage was not possible sooner.
Tesla proxy adviser Glass Lewis was averse to the re-election of Tesla chairwoman Robyn Denholm and the plan to end third-party D&O in response. However, Lewis approved her following the decision by the Tesla board to replace their previous liability insurance policy.
The technology company is facing massive lawsuits over numerous issues, including the long-term performance batteries in its cars as well as its decision to acquire solar energy producer SolarCity.