Practical Law reported on the key terms of a settlement agreement between the Police and Fire Retirement System of the City of Detroit (“System”) and Tesla filed with the Delaware Chancery Court prompted by System’s shareholder derivative suit alleging a breach of fiduciary duty and unjust enrichment relating to the non-employee directors’ robust compensation. While all of the terms of the agreement—which include the directors’ repayment of approximately $735 million in cash, stock, and option awards and an annual say-on-director pay vote—are noteworthy, several agreed-upon corporate governance reforms (required to be implemented and maintained over a 5-year period as part of the settlement) can be characterized as broadly applicable best practices that all companies should consider on an ongoing basis, namely:
(1) The Compensation Committee charter should include responsibility for:
- Conducting an annual review and assessment of non-employee director compensation, including cash and equity-based compensation
- Engaging an independent compensation consultant annually to advise on the annual director compensation review and assessment
- Making recommendations to the board of directors regarding non-employee directors' compensation
(2) The Board should review annually:
- Non-employee directors' compensation
- Compensation Committee's recommendation for non-employee director compensation
(3) The company should document its review annually of its internal controls relating to the administration and other aspects of non-employee director compensation.